HDFC Bank stock outlook improves as funding pressure eases and NIM visibility strengthens

Investment View and Valuation

In its 4 August 2026 Company Update, Kotak Securities maintains a BUY rating on HDFC Bank and assigns a fair value of Rs 1,050. The broker believes the current valuation already reflects most near-term concerns.

The central investment case is that improving visibility on net interest margins could lead to earnings upgrades and a valuation re-rating.

FY26 Operating Performance

HDFC Bank navigated a challenging FY26, according to Kotak Securities. Net interest margin faced pressure from the interest-rate cycle and an unfavourable funding mix, although improving loan growth and stable asset quality partly offset these headwinds.

Loan growth improved to 12 per cent year on year in FY26, led by the non-retail segment. Asset-quality ratios remained resilient, and the bank reported no increase in stress indicators across products in its early-warning indicators.

Margin Pressure and Post-Merger Recovery

The principal negative was the reported 15-basis-point quarter-on-quarter decline in FY26 net interest margin to 3.4 per cent. Kotak attributes the margin contraction to the rate cycle and the composition of liabilities.

The broker also notes that the post-merger investment thesis has taken longer than expected to play out. The anticipated recovery in return on equity has been delayed by sluggish improvement in net interest margins. Performance at the capital-market subsidiaries, securities and asset management, was mixed.

Improving Operating Backdrop

Kotak Securities sees an improving operating backdrop for HDFC Bank. Competitive intensity is easing, liability-side conditions are improving and the FCNR window provides incremental funding flexibility.

In the broker's view, moderating funding pressure and receding margin headwinds improve the outlook for net interest margin expansion. This margin recovery is important because it could support earnings upgrades and a re-rating of the stock.

Key Risks and Overhangs

Factors that could weaken the investment thesis include:

• Continued pressure from the interest-rate cycle.
• An unfavourable liability mix.
• Slower-than-expected recovery in net interest margins.
• A continued delay in post-merger return-on-equity recovery.
• The resignation of the Chairman, which remains an overhang.

Report Scope

Kotak Securities does not provide a detailed valuation methodology, revised earnings estimates or explicit management guidance in the available report summary. Its fair-value rationale is that valuation reflects most near-term concerns, while improving margins could unlock earnings and valuation upside.